China’s regulator pours cold water on debt-fuelled land purchases, starting with Shanghai

The latest move tightens the lid on financing for property development, part of the government’s year-long campaign to cool the country’s overheating real estate market and curtail runaway prices from causing social unrest.

China’s banking regulator has instructed lenders to tighten their scrutiny of loans for mergers and acquisitions to ensure that capital isn’t diverted to buy land, dousing the debt-fuelled boom in second-hand land sales as developers sought to find land to build on.

Banks must comply with current policies on M&A loans and ensure these funds aren’t used in deals where land is the main underlying asset, according to a January 24 circular by the Shanghai branch of the China Banking Regulatory Commission (CBRC), obtained by the South China Morning Post.

M&A loans that are used to buy stakes in property companies must disclose their associated lenders and borrowers, and the land plots that change hands must have completed at least 25 per cent of their budgeted investments, according to the circular.

The regulator’s latest move tightens the lid on financing for property development, part of the government’s year-long campaign to cool the country’s overheating real estate market and curtail runaway prices from causing social distress. Some banks have stopped granting new credit lines to property developers, and stopped issuing loans for construction projects altogether, according to a report this week by China Securities Journal, a newspaper run by state-owned Xinhua News Agency.

The government has good reason to act. Mergers and acquisitions in the property industry is likely to have soared to 600 billion yuan (US$95 billion) last year, according to data by Mingyuan Property Research Institute. In Shanghai, China’s premier commercial hub, as much as 120 billion yuan was spent last year in secondary-market transactions, more than the 113.4 billion yuan involved in land sales through public auction in the same period, according to Cushman & Wakefield’s data.

The latest curb is expected to damp China’s secondary land sales market, where developers had been turning to after finding the primary land market - where builders bid for state land under onerous conditions - too costly and too difficult. One example of such onerous conditions is that up to 30 per cent of land must be set aside for building rental-only apartments, a low-margin product that interests very few developers.

The Chinese regulator also shut the door on the current practice of getting loans on-the-go, whereby developers get partial bank loans commensurate with the permit and the progress of their projects. Any project that fails to obtain all necessary permits, or which fails to pay all sales fees to the state, would not be eligible for a loan, the regulator said.

Still, the regulator said it wants to encourage M&A activities to burnish Shanghai’s status as a “technology and innovation centre,” including in the upgrade of manufacturing, technology transfer and the new economy.